Wildhorse Energy: AIM newcomer eyes European energy revolution

Wildhorse Energy (LON:WHE, ASX:WHE) joins AIM today hoping to replicate the success of a small band of pioneering firms that have revolutionised the US gas market in the past two decades.

The company, already quoted on the ASX, is taking what’s called a compliance listing on the London Stock Exchange’s AIM in order to raise its profile with European investors, rather than raising funds.

Wildhorse has a unique story as the firm leads the field in a process called underground coal gasification, or UCG. 

This is an in-situ gasification process where underground coal seams are converted into synthesis gas, or syngas, by mixing coal, oxygen and steam through an injection well.

The process uses directional drilling techniques that are commonplace in the oil and gas sector to follow the coal seam. It then bores two separate holes – one to pump in the steam and oxygen and the other to extract the gas.

There are parallels here between Wildhorse and the likes of Chesapeake Energy, Exco Resources and Petrohawk Energy during the mid-1990s.

The trio were masters of horizontal drilling that delivered phenomenal results when used to unlock the potential of the gas plays in the Barnett and Haynesville formations in Texas, the Marcellus shale of Pennsylvania and the giant Bakken play that straddles the US-Canada border. 

In doing this they helped transform the US gas market as supplies expanded and prices fell. At the same time the collective value of these unconventional gas producers rocketed from US$5.2 billion in 2001 to US$79.65 billion last year, according to research from KPMG.

Proof that unconventional gas is now mainstream comes in the form of the proposed US$17.5 billion acquisition of Petrohawk by Anglo-Australian mining giant BHP Billiton, one of many recent deals in this space.

The Americans use a rather controversial process called fracking to unlock the gas, which is linked with water-table contamination that could ultimately lead to legislation and curbs on its use.  

UCG of the sort championed by Wildhorse does not use hydraulic fracturing technologies.

The AIM debutant is using Hungary as its test-bed for a strategy that could be rolled out continent-wide.

It is a country that is heavily reliant on Russian gas, meaning it is eager to wean itself off this source of supply and ready to adopt home-grown contributions to the energy network.

Its first project is Mecsek Hills in Hungary, near the pretty university town of Pecs, though it also has two other prospects in the country – Izabela and Amelie.

The Mecsek coal formation in southern Hungary is potentially huge and contains an estimated 1-1.25 billion tonnes of the fossil fuel, which includes a JORC Inferred maiden resource of 81 million tonnes.

This is what’s called stranded coal – coal that can’t be mined because it is either too deep, or just too difficult and expensive to reach.

So in effect it is worthless – unless of course you have a technology that can unlock the energy contained in these rich, black bituminous seams.

There is stranded coal all over central Europe, and Wildhorse’s MD Matt Swinney makes no secret of the fact that the company is after other similar projects in Poland, the Czech Republic and Germany.

Once it is proven conclusively that UCG can reliably produce commercial volumes of syngas, these once worthless coal prospects take on a new veneer and valuation – so Swinney and his team are in a race to tie up the best prospects in super quick time.

“The gas markets are huge and the countries of Europe want to break their reliance on imported gas,” Swinney said. “So as a first mover the valuation growth potential is staggering.” 

The Mecsek Hills project sits right next to a power station run by Dalkia Energia, owned by French utility giants Veolia and EDF. 

This provides a potential buyer once it begins pumping in 2013. Although Wildhorse has a memorandum of understanding with Dalkia, it is only one of many companies to show an interest.

The investment community is also starting to realise that Wildhorse may be onto something quite revolutionary. Blue-chip backers such as Capital Research and Management, one of the world’s largest natural resource investors, and Genesis Asset Managers, a specialist energy investor with many years experience in Central Europe, have come aboard recently.

The company is not the only player in this expanding niche sector.  Australian pair Linc Energy (ASX:LNC) and Carbon Energy (ASX:CNX) are also at the forefront of underground coal gasification.

Its technical team comes from the coal-to-liquid specialist Sasol and electricity generator Eskom.

For investors in Wildhorse, the kicker is the group’s uranium project, which is also in the Mecsek Hills.

A JORC resource of 77 million pounds gives some hint to the value inherent in Wildhorse. The company’s current market capitalisation ascribes an in-the-ground value of less than US$1 a pound. More usually, projects of this type are worth US$2-$8 per pound. 

“The uranium provides clear valuation transparency, and shows we are seriously undervalued compared with our peers on uranium alone,” said Swinney. “What we are very excited about is the regional energy dynamic which provides a compelling environment in which to build our UCG assets.”